Commentary: Will Credit Rating Downgrade Spark Pension Reform?

By Rob Roper

On October 23, Moody’s, the investors credit service, downgraded Vermont’s bond rating from AAA to Aa1. This has significant implications for the state’s ability to borrow money and the cost of doing so. The reasons Moody’s cited for the downgrade were “low growth prospects from an aging population,” and “debt and unfunded post-employment obligations relative to GDP….” This last point is in reference to Vermont’s unfunded pension liabilities of $4.5 billion.

The pension crisis is an issue has been simmering below the public radar for years. Although huge in its potential consequences, it has not received a lot of critical attention for a number of reasons. One, politicians want to avoid it because it is expensive to fix, which can only anger taxpayers and/or beneficiaries of cut programs, and politically complicated as it affects the powerful public employee unions, who don’t want the system, which provides very generous benefits, changed. The other is it is not a particularly sexy issue for the news media; about as fun and interesting for most people as figuring out your taxes, and for most of us more complicated.

Hopefully this credit downgrade provides the shock necessary to change this denial dynamic and spur all parties to get serious about reforming the system. It can be done. Look at Rhode Island.

Rhode Island is a state that has a lot in common with Vermont. It is a small New England state with an aging population and an overall population that is in decline. (In the last Census, Vermont and Rhode Island were the only two states that experienced an actual population loss.) It has little economic growth, and its governance is overwhelmingly dominated by Democrats.

In 2011, Rhode Island found itself dealing with a pension crisis similar to Vermont’s today: long neglected, politically challenging, but ready to explode. The state of a little over one million residents had unfunded pension liabilities of $6.8 billion, compared to Vermont today of 623,000 residents and $4.5 billion in liabilities. Rhode Island also had a moderate Republican turned Independent Governor and a Democratic Treasurer who, either out of good governance or sheer necessity, were willing to take up the challenge of fixing the problem.

What they accomplished was a complete overhaul of the state’s pension system in The Rhode Island Retirement Security Act (RIRSA) of 2011, which went into effect in 2012. According to an excellent forty-two page summary of the process and the end product done by The Reason Foundation, RIRSA had five major planks: “1. A suspension of cost-of-living adjustments until the pension system reaches a combined 80 percent funding level; 2. A new defined-contribution plan to work in tandem with the current defined-benefit pension plan; 3. An increase in retirement age for current employees; 4. A change to the amortization rate of liabilities, and 5. A plan to help local governments bring their unfunded pension liabilities under control.”

Not to say that this was without controversy. After RIRSA passed, several state and municipal unions sued to block the law from taking effect. This led to a settlement in 2015, which “included two one-time stipends payable to all current retirees; an increased cost-of-living adjustment cap for current retirees; and lowering the retirement age, which varies among participants depending on years of service.” (Pensions & Investments 5/29/18) Even this settlement was challenged and only just resolved in favor of the state this past spring.

But, for those politicians worried about the electoral consequences of tackling a tough “third rail” issue, it’s worth pointing out that the state treasurer in 2011, Gina Raimondo, is now Rhode Island’s governor.

For all its similarities, Rhode Island is different than Vermont and a Vermont solution would necessarily have to be tailored to fit our own unique circumstances. I offer this example only to illustrate that reform can and should be accomplished. As David Coates, Vermont’s local guru on pension issues, warned last February that, “in 2008 [Vermont’s] pension payment was 2.25 percent of revenues, in 2012 6.4 percent, in 2017 9.4 percent and in 2019 it will increase to 11.5 percent.” (VTDigger, 2/11/18) This is unsustainable, and the implications for all aspects of our government are dire. In that same piece, Coates also warned that failure to address these problems would inevitably lead to a downgrade in our state’s credit rating. Guess he was right! Hope our politicians take notice.

– Rob Roper is president of the Ethan Allen Institute. He lives in Stowe.

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